Bitcoin rebounded after a sudden fall triggered apparently by a ‘bitcoin-exchange’ halting trade due to technical reasons, which led to panic selling over fears that the ‘bitcoin bubble’ was about to burst. A look at how the cryptocurrency market works

What is cryptocurrency?

A digital currency exchanged entirely over the internet. All information on its creation, transactions and validation of authentic exchange is secured through cryptography, the art of making codes. Most of these currencies are decentralised. Unlike a central banking system, which controls money supply, the creation of cryptocurrencies is public. Further, no central authority can interfere in setting its value, which is decided purely by market forces.

Website coinmarketcap.com, which tracks such currencies, says there are 1,355 cryptocurrencies being traded in 7,399 markets. As on December 14, the total value (market capitalisation — price multiplied with currency in circulation) of these currencies was $514 billion. Bitcoin, the oldest cryptocurrency, dominates with over 54% market share.

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What is bitcoin?

The concept of bitcoin was proposed by an unknown developer who identified himself as Satoshi Nakamoto. In a 2009 paper that he put up on his cryptography mailing list, Nakamoto specified the concept and proof. Nakamoto left the project in 2010 but the community grew exponentially thereafter. Bitcoin owners use various websites to trade and buy goods or exchange it with other physical currencies. Till the recent short-lived drop, the surge in its price caused global uproar and interest. A comparison of average price of this currency explains why. The average price was $915 last January, increasing to $14,392 by December — a rise of 1,473%.

How does the crypto-economy compare with real ones?

Comparison of market capitalisation of cryptocurrency with broad money (total money in an economy) throws up interesting facts about the scale of this economy. Broad money includes total money deposited in banks, nonbank financial institutions, state and local governments, non-financial public enterprises, and the private sector. Although the crypto-economy is much smaller than that of China and the US but it is fairly comparable with other economies. For instance, it is more than one fourth the size of India’s total money with the public or in the banks.

How is crypto currency taxed in India?

In India, the Central Board of Direct Taxes has no guidelines on income-tax for profits on the sale of cryptocurrency. But if bitcoins have been purchased as investment, any profit on sale can be booked as capital gains, experts say.

For instance: Somebody bought a bitcoin for Rs 40,000 four years ago in January 2013 (FY 2012-13) and sold it for Rs 69,500 in November 2016 (FY 2016-17), making Rs 29,500 profit

*Cost of acquisition multiplied by (Cost Inflation Index of the year of sale/CII of the year of purchase)